A blawg containing a periodic review of topics of interest in corporate and commercial law that impact India

Monday, November 5, 2012

Petrodel v Prest and the Corporate Veil: A hard case that makes good law?

Lord
Hoffmann once said,
with reference to interpretation of contracts, that the “fundamental change which has overtaken this branch of the law” as a
result of Lord Wilberforce’s speech in Prenn
v Simmonds [1971] 1 WLR 1381 was not always “sufficiently appreciated”. The same could have been said of recent decisions
at first instance on the corporate veil (particularly Ben Hashem v
Shayif), until two magisterial judgments of the Court of Appeal this
year: VTB
Capital v Nutritek and, last week, Petrodel v
Michael Prest. VTB was
concerned with a different problem – the consequences
of lifting the corporate veil, but approved (with one exception that is
irrelevant here) Munby, J’s six principles that set out when a court is
entitled to lift the corporate veil. In Petrodel,
which was concerned with this very question, the Court of Appeal (Rimer and
Patten LJJ, Thorpe LJ dissenting) has confirmed that this is the law.

There
is no doubt that this was a hard case, and an appeal to the Supreme Court is expected. Yet, unless there is statutory language or legislative history to which
the court was not referred, the Court of Appeal’s conclusion is correct. Mrs
Yasmin Prest, in the course of divorce proceedings, sought an appropriate share
of the assets of Mr Michael Prest. The power of the High Court (Family
Division) to grant this relief is found in section 24(1)(a) of the Matrimonial Causes Act, 1973,
which provides that a court may make an order that

a party to the
marriage shall transfer to the other party, … such property as may be so
specified, being property to which the first-mentioned party is entitled,
either in possession or reversion” [emphasis added].

Mr
and Mrs Prest had lived a life of luxury; Mr Prest, an international
businessman, had, for “conventional
reasons including wealth protection and tax avoidance”, established a large
and complex network of group companies with circular ownership. Petrodel
Resources Ltd [“PRL”], one of these
companies, owned immovable property in London, as did other group companies [“the Petrodel companies”]. Mrs Prest
sought an order declaring that these properties, which were owned by the Petrodel
companies, were in fact “property to
which Mr Prest is entitled, either in possession or reversion" and on
that basis a direction to the companies to
transfer them to her. Relying principally on certain obiter dicta in Nicholas v
Nicholas [1984] FLR 285, Moylan, J. made this order. In a powerful
judgment, Rimer LJ explains that the judge fell into a “fundamental error”.

The
most important factual material consists of the following undisputed findings
that the judge made:

(a)Mr Prest was a one-man controller and
ultimate owner of the Petrodel companies. He had the “power” to cause the
companies to take any step it was entitled to take, including the transfer all
their assets to him. He had not exercised this power;

(b)All directors of the Petrodel
companies acted on the instructions of Mr Prest, and none of the Petrodel
companies had any significant minority interests;

(c)The former matrimonial home was
purchased in the name of PRL, but was held in trust for Mr Prest;

(d)Seven other immovable properties in
London, the subject matter of the appeal [“the
seven properties”], were also purchased in the name of the Petrodel
companies, but there was no finding that these were held in trust for Mr Prest;

(e)There was no “impropriety” in the
creation or use of the Petrodel corporate structure; it was set up “for conventional reasons including wealth
protection and avoidance of tax”;

(f)Mr Prest had repeatedly and
wilfully failed to make disclosure of his finances in the divorce proceedings; he
deliberately misled the Nigerian courts into issuing orders that he could use
as an excuse for not complying with his English disclosure obligations; “his evidence was both deceitful and
shambolic”

The
law on when a court may lift the corporate veil has, in recent years,
crystallised around the six principles set out by Munby, J. in Ben Hashem.
In essence, these are that a court may not lift the corporate veil simply
because the interests of justice require it, even if there is no “unconnected third party” involved in the
company, and may do so only if there is “relevant impropriety”, that is,
impropriety in the use of the corporate
structure (and not unconnected impropriety, such as fraud not involving the
use of the corporate structure). As the Court of Appeal explained in Adams v Cape Industries, a court, absent
statutory language that permits or compels a different approach, may lift the
veil only on these grounds. The
common law, as we have noticed, is substantially narrower than the Indian law
on the point, because it requires a finding of not impropriety per se but of impropriety in the use of the corporate structure.

In
Petrodel, it was clear that there was
no “relevant impropriety” in this sense. As Rimer LJ explains, dismissing a
respondent’s notice that sought to overturn the judge’s findings to this
effect, Mrs Prest would have had to demonstrate that the Petrodel companies
were established or used for the purpose of
disguising the fact that the beneficial owner of their properties was Mr Prest;
it was not enough that “in reality” the property belonged to the husband (as
Rimer LJ pointed out, such imprecise expressions are not helpful), nor that “justice”
required that Mrs Prest have a share of the property that Mr Prest had the
“power” to use for himself. However, Moylan, J., despite finding that there was
no relevant impropriety in the Ben Hashem
sense, proceeded to lift the veil, reasoning that certain dicta in Nicholas, and the duty of the Family Court to make a fair
apportionment of assets, allowed him to do so.

The
importance of the case lies in Rimer LJ’s clear exposition of the law: if there
is no relevant impropriety in the Ben
Hashem sense, a court cannot lift the veil, no matter how compelling the
“justice” of the case, and the Family Division is not entitled to apply
different principles or disregard the law on corporate veil simply because it
is not exercising commercial jurisdiction. The only real authority to the
contrary, on which the judge relied, was Nicholas.
In that case, the husband was a 71 % shareholder in two companies; the
remainder was owned by unconnected business associates. The Court of Appeal
held that the company’s property could not be treated as the husband’s
property, but Cumming-Bruce LJ, relying on “abundant authority” (which was not
identified) said that this can be done by lifting the veil if there are no
“minority interests” in the company. As Rimer LJ correctly notes, Nicholas therefore implicitly recognises
that the property of a company is not property
to which a controlling shareholder is entitled unless the veil is lifted. The observation that the veil can be
lifted if there are no minority interests is contrary to the established
principle that a one-man company is as much a company as any other; as Rimer LJ
points out, “apparently a heretical
departure from the Salomon principle”. The “abundant authority” to which
Cumming-Bruce LJ referred was perhaps Lord Denning MR’s observations in Wallersteiner v Moir, which, however,
like DHN Food Distributors, are not
good authority in view of the subsequent decisions in Adams and now VTB (see
para 132). These dicta in Nicholas, therefore, involve a “head-on disregard of Salomon” and the
potential injustice caused by the inability of the court to distribute
corporate assets to a claimant for divorce is “no basis for assuming a jurisdiction to pierce the corporate veil… [t]he
only implicit justification is that family justice requires it. That, without
more, is no justification”.

As
to s 24(1)(a), Rimer LJ held that the word “property” used in that section cannot
mean something other than what property means in general; and, as to the
submission that the Family Division need not follow the authorities on
corporate veil, “there is…but one law and
but one High Court and all its divisions must apply the same law”. As to
the judge’s reasoning that Mr Prest had the “power” to cause the companies to act
as he wished them to, Rimer LJ explains that “power” is not “property” (“it is heretical to suggest that the total
control that a single individual is entitled to exercise over the affairs of
his one-man company is a feature resulting in the company’s assets becoming
assets to which he is ‘entitled’”).

To
summarise the Court’s conclusions: section 24(1)(a), in the ultimate analysis,
is a simple provision – if the company is “entitled”, in possession or
reversion, to certain property, it follows that Mr Prest was not, and vice
versa. The judge found, and the Court of Appeal accepted, that the matrimonial
home was held beneficially for Mr Prest although legal title was in the
company; this could properly be described as property to which Mr Prest is
“entitled”. There was no such finding with respect to the other properties held
in the name of the Petrodel companies. It followed, unless the corporate veil
was lifted, that the Petrodel companies were “entitled” to those properties and
that Mr Prest was not. The corporate veil cannot be lifted unless the
principles in Ben Hashem apply. The
judge accepted that there was no relevant impropriety; therefore Ben Hashem does not apply. It is
irrelevant that the husband was in sole control of the companies; that he could
at will obtain money from the company; that he could cause them to transfer
their assets to him. Unless this power is exercised,
the property remains the company’s, not Mr Prest’s. If this produces injustice,
as Thorpe LJ considers it does (one should, however, note that the companies
may have creditors whose priority is indirectly defeated by matrimonial orders
such as the one Mrs Prest sought), that is a matter for the legislature.

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